Case Study of Guan Chong Berhad (5102)

By Stella Goh – Market Data Analyst | 27 November 2019

Overview

Guan Chong Berhad is an established investment holding and provision of management services company founded in the Year 1980 based in the southern state of Johor, which primarily involved as one of the world’s largest cocoa ingredients producers in Malaysia. The group produce cocoa bean with a grinding capacity of 80,000 metric tonnes (MT) per year in Pasir Gudang, Malaysia and 120,000 MT per year in Batam, Indonesia.

GCB was listed in Main Market of Bursa Malaysia on 8 April 2005. The group has established clientele which including the world-famous chocolate makers such as Mars and Hershey’s with a global distribution network of more than 70 distributors or agents in Asia, Europe and the United States of America.

There are 7 subsidiaries of GCB such as Guan Chong Cocoa Manufacturer Sdn Bhd, PT Asia Cocoa Indonesia, GCB Cocoa Singapore Pte Ltd, GCB Specialty Chocolates Sdn Bhd, GCB Foods Sdn Bhd, GCB America Inc. (Carlyle Cocoa) and PT GCB Cocoa Indonesia.

Business Model

Guan Chong Berhad principally involved in the business of manufacturing, distributing and trading of cocoa-derived food ingredients such as Cocoa Liquor (Cocoa Mass), Cocoa Butter, Cocoa Cake and Cocoa Powder. Most of their cocoa ingredients market under Favorich brands and the product are widely used in chocolate, confectionery, food and beverages industries worldwide. There are also other brands such as CacaoRich and Melko created with specially formulated feel good elements such as less sweet taste and rich in antioxidants. The group also have actively involved in doing private brands for hypermarket such as TESCO ChocoMalt, Choco Champ, Tesco Value, Jusco Selections, Packers Best etc.

As the world’s fourth-largest cocoa grinder, GCB also involved in other cocoa related industries such as blending and mixing vision that used to produce cocoa preparation. GCB also has two facilities located in Delaware and New Jersey, the United States that undertake cocoa cake grinding, cocoa liquor and butter melting as well as cocoa butter deodorising. The business operations are supported by trading subsidiaries in Singapore and Indonesia.

Financial Review


Based on the past 5 financial years of revenue chart above, the group’s revenue grew from RM1.8 billion in FY2014 to RM2.4 billion in FY2015 equivalents to 30.89% and started to decline from FY2015 to RM2.1 billion in FY2017. When it comes to FY2018, GCB successfully rebound back from RM2.1 billion from the previous year to RM2.3 billion equivalents to 5.84%. The increase in revenue was mainly due to the increased in sales of cocoa ingredients to their existing multinational customers, and expansion of their grinding facility in Pasir Gudang, under GCB Cocoa Malaysia Sdn Bhd to its present capacity of 50,000 MT from 90,000 MT previously.

Guan Chong Berhad has successfully achieved a tremendous high record of gross profit by 82.06% from RM154.3 million in FY2017 to RM280.9 million in FY2018. Based on the past 5 years of CAGR basis, the gross profit has grown 34.69%. The growth of gross profit was mainly driven by the higher capacity utilisation of their plants and strong growth in sales volume for cocoa bean, which has helped to offset the lower average of selling price during the year due to decline in the commodity price of cocoa beans.

The Profit After Tax (PAT) of GCB rose 108.81% from RM91 million in FY2017 to a new high of RM190.1 million in FY2018. On a CAGR basis, the Profit After Tax (PAT) grew by 113.09% was in line with the growth of revenue and gross profit.

Cash Flow Statement

The net cash from operating activities have obtained a positive cash flow of RM302.5 million in FY2018 indicates that the company is healthy and have enough cash used for business expansion when compared to previous years.

The net cash from investing activities in FY2018 is (-RM99.2 million) was mainly due to purchase of Property, Plant and Equipment (PPE) (RM97.6 million), payment to sub-leases of warehouses (RM0.124 million) and advances payment to the ultimate holding company (RM4.3 million). The negative cash flow indicates that the firm is investing more in its business to grow.

The net cash from financing activities in FY2018 is (-RM199.7 million) was mainly due to the dividend payment (RM9.6 million), share repurchased (RM0.152 million), net placement of fixed deposit pledged (RM0.455 million), and net movements in borrowings (RM189.5 million).

Does the company able to pay back its liabilities? Based on my computation of liquidity ratio, GCB has a current ratio of 1.239 times in FY2018 indicates that the company do not face any liquidity issue as they are capable of paying back its liabilities on due by using current assets such as inventories, trade & other receivables, derivatives financial assets, current tax assets, cash and bank balances amounting to RM1.3 billion.


Prospect and Challenges

GCB plans to keep expanding after its latest €60 million (RM278 million) investment in a new cocoa bean processing plant in Africa, called Ivory Coast. According to the managing director and CEO Brandon Tay Hoe Lian, he said that Ivory Coast-based grinders enjoy zero tax on cocoa products compared with Malaysian 7% duty. The new plant in Ivory Coast will boost up the group’s production capacity by another 60,000 tonnes when it starts operation by the first quarter of FY2021. (Source: TheEdge, 1Oct2019)

Besides expansion in Africa, GCB also pursues more exports to existing and new markets as the demand of chocolates remains on an uptrend, due to the rising consumption in major markets such as Europe and the United States, and sanguine Asian demand on the rising affluence and appetite for cocoa products. (Source: TheEdge, 18Nov2019)

GCB also stated that they would explore opportunities to expand their production facilities to major cocoa-producing countries to enhance their competitive edge which would provide significant cost savings in freight and transportation, as well as enhance their manufacturing supply chain. (Source: Annual Report FY2018)

Rating System

Return on Equity (ROE) = Good

Revenue [5 years CAGR] = Average

Net Earnings [5 years CAGR] = Excellent

Basic Earnings per Share (EPS) [5 years CAGR] = Excellent

Interest Coverage = Average

My Insight

Based on my calculation on Discounted Earnings Model, Guan Chong Berhad has a fair value of RM11.749. The current market value of GCB is RM2.80 which is undervalued. (Based on 25Nov2019). GCB has a beta of 0.643 (500days) indicates that the company is less volatile than the current market, which means the investors/traders are not actively trading in this stock, they may face lower risk. Based on my computation of Compound Annual Growth Rate (CAGR), GCB has an expected market return of 6.12%.

In conclusion, Guan Chong Berhad has achieved outstanding performance in FY2018 as the Profit After Tax has achieved a new high equivalent to 113.09% based on 5 years as the group are keep on expanding their business by increasing their productivity, activities of exportation and production facilities.

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